Question

Sycamore Health Supplies (SHS) has identified an opportunity to invest in a process to make medical grade face shields to help satisfy the increased demand for PPE in the health care sector. While they have experience producing similar molded plastic products, they do not have the equipment to make shields currently. They would need to invest in a computer-controlled molding process that could make the primary shield and attach it to a headband so that the shield could be worn. The molding machine would cost $2,400,000 and could be in place in 3 months from today (April 1). It would cost $2.90 per mask to make the shield and attach it to the headband. Headbands would be purchased from a supplier at a cost of $1.10 each. Each finished face shield would be individually sealed in a sterile plastic wrap using existing machinery at a cost of $0.40 per unit. The finished product would be packaged in cases of 48 and it would cost them $7.20 for materials and labor to package each case. Once in place, SHS figures their new process could produce and package an average of 50,000 masks per month. Each case would sell for $420, and they would only sell case quantities. Customers expect delivery of the product when ordered – they will not accept having to backorder product. Demand for shields is very high and expected to remain there for the next couple of years at least. SHS forecasts that demand for their shields at the planned price point currently exceeds their planned capacity at an estimated current (April 1) level of 90,000 per month. Demand is expected to remain steady for 6 months, after which demand is projected to drop 7% month over month for the next 6 months, and then decrease 3% month over month for the next 12 months where it will then stabilize for the foreseeable future.

What would be the break-even point for SHS if they decide to invest in this opportunity?

Answer 1

The break-even point for SHS, if they decide to invest in the opportunity to produce medical grade face shields, would be reached after selling approximately 11,900 cases, based on the given fixed costs and variable costs per case.

Step-by-step explanation:

To calculate the break-even point for SHS investing in the opportunity to make medical grade face shields, we need to examine the costs and revenues associated with production.

Let's break down the costs: Each mask costs $2.90 to produce, headbands are $1.10 each, and the individual sterile wrapping is $0.40 per unit. Packaging costs for a case of 48 units are $7.20. To find the cost per case, we add the costs for 48 masks, 48 headbands, 48 wrappers, and the packaging:48 masks × $2.90 = $139.20

• 48 headbands × $1.10 = $52.80
• 48 wrappers × $0.40 = $19.20
• Packaging per case = $7.20

Adding these together yields the total cost per case:

$139.20 (masks) + $52.80 (headbands) + $19.20 (wrappers) + $7.20 (packaging) = $218.40 per case

The selling price per case is given as $420, and the fixed costs for the molding machine are $2,400,000.

The break-even point in terms of the number of cases is calculated by dividing the fixed costs by the difference between the selling price and the variable costs per case:

Break-even point (cases) = $2,400,000 / ($420 - $218.40) = $2,400,000 / $201.60

The break-even point in terms of the number of cases is approximately 11,900 cases.